Global Economics

Slovakia Joins Decade-Old Euro Zone

Slovakia has become the 16th member of Europe's monetary union. It's the first euro zone member from Central Europe—and the poorest

Ten years after the original 11 countries in western Europe set up a common currency, the monetary union is due to enlarge to Slovakia, as its 16th member state and the first in central Europe to switch to the euro.

"I'm sure this event will trigger a lot of positive expectations and positive results for the Slovak economy and citizens," EU economy and monetary affairs Joaquin Almunia told journalists ahead of 1 January.

"The Slovak economy was able to fulfil al the conditions required to join the euro less than five years after the country entered the EU and this had required a political will and a very dynamic economy. Now it's the time to reap the benefits of sharing the same currency," with 325 million Europeans in the 15-strong eurozone.

Some diplomats and officials described Bratislava's path to the euro as quite "bumpy," with the country's ambassador to the EU Maros Sefcovic claiming Slovakia had to convince colleagues about its readiness "at least twice as hard" as previous euro newcomers.

After Slovenia entered the eurozone in 2007 and Malta and Cyprus followed suit at the beginning of this year, Slovakia will be the first central European state to join the euro club. It will be the poorest country, with some 67 percent of the eurozone's average GDP.

During the evaluation process, the long-term prospect of the Slovakia's price stability caused the biggest doubts over its readiness to adopt the euro, but despite recording the highest economic growth rates across the EU, Slovakia managed to keep inflation below the required threshold.

Concerning the switch-over in January, concerns over inflation have become "secondary," according to Daniel Gros, director of the Brussels-based Centre for European Policy Studies.

He argues that due to the financial crisis, the main challenges for Bratislava will instead be to maintain domestic financial stability with a well-functioning inter-banking market and to have industry not too much affected by the slow-down in Europe, particularly in the automobile sector.

Slovakia is the third-largest car manufacturer in central Europe and one of the fastest growing automotive markets in the region.

The car industry has been severely hit by the global recession followed by the credit crunch however, with industrial production flat on the year in October—the worst performance since March 2005—and below market forecast of a 4.7 percent increase, according to the Slovak Statistics Office.

Commissioner Almunia argues that it will be crucial that Slovakia continues to catch up in terms of GDP per capita levels, as well as productivity and competitiveness levels.

"The Slovak economy should be flexible and dynamic, its budgetary policy sustainable and its labour market adjustments should take place smoothly—if these conditions are met, all the benefits of the euro will be higher," said the commissioner.

Who comes next?

As a significantly poorer country having transformed itself from a centrally-planned economy to a market economy, Slovakia's accession to the EU's monetary union has been watched closely as a test case for other states hoping to join.

"Slovakia will be the key example in the future when decisions on future entrants are made because if the country functions smoothly, it will be a good argument for the countries in the same region," Zsolt Darvas, from the Brussels-based Bruegel think-tank told EUobserver.

He pointed out that Poland and Hungary are the most likely to join after their Visegrad neighbour, as the governments of both countries have indicated they would like to enter the so-called European Exchange Rate Mechanism (ERM II), a fixed exchange rate waiting room for the euro.

As the candidates to join the European currency need to remain in the system for a minimum of two years, Mr Darvas argues that both Poland and Hungary could join the euro in three years from now.

While Poland currently meets all necessary euro entry criteria, albeit with slightly high inflation, Hungary would have a problem with a public debt, currently at the level of 66 percent of GDP, above the eurozone's threshold of 60 percent.

The Czech Republic would also make it to the euro club without major problems according to several analysts. But just as in the UK, where some insiders say the government is considering such a possibility, the euro remains a matter of political division.

The Baltic states of Estonia, Lithuania and Latvia have all joined ERMII but are currently facing problems due to the global financial crisis, so their original plans to adopt the euro in 2009 or 2010 have been postponed until an unknown date.

On the other hand, Denmark might be the next western European country to shift to the common currency area—also as an indirect consequence of the credit crunch and economic recession.

he eurozone was launched on 1 January 1999 across 11 countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece met the convergence criteria in 2000 and joined in January 2001.

The UK and Denmark secured a derogation to stay outside the euro area, while Sweden had legally committed to adopt the common currency but had so far not fulfilled the obligation as the country's voters rejected the move in a referendum.

After Slovenia, Malta, Cyprus and Slovakia, all other countries in central and eastern Europe as well as Bulgaria and Romania are also due to become the members of the eurozone when they are ready.